Commentary

Anne Plested, head of Fidessa's EU Regulation Change programme, has written a short blog arguing that although we should be thankful that ESMA have taken a pragmatic approach to moving things along, more bottlenecks could appear in the future.

Nasdaq's Regulatory Hole'

Story Utilities

Market fragmentation has resulted in a "regulatory crisis," Nasdaq officials charge in a white paper and letter sent to the Securities and Exchange Commission.

It has been caused, in part, because Nasdaq trades are increasingly printed in other venues such as the Cincinnati Stock Exchange. [See story opposite.]

This means the task of overseeing trading, for groups such as Nasdaq and the Intermarket Surveillance Group, has become more expensive and difficult, according to the white paper.

Insider Trading

"Given that some of the most prevalent types of trading abuses, such as marking the close, manipulation and insider trading, are often conducted across more than one market, it is imperative that the regulator or regulators responsible for preventing such activity have a means for gathering and integrating such real-time regulatory information from multiple markets," according to the white paper.

The problem, Nasdaq claimed, is not going away. Trades outside the Nasdaq system were about two percent in January 2002. By November of last year, that number had risen to 17 percent. This is causing price concerns as Nasdaq and other exchanges find the costs of regulation rising at a precipitous rate.

"There is currently a regulatory crisis facing the markets that trade Nasdaq securities," Nasdaq officials wrote.

Fragmentation

The officials note that fragmentation does enhance competition. However, that is creating pressure to lower regulatory and other costs. Indeed, "fragmentation is making it more difficult and costly for SROs to meet their regulatory responsibilities...Nasdaq believes that the current system for overseeing trading in Nasdaq securities, although adequate when Nasdaq was the sole center of liquidity, is now left with holes that grow larger by the day," the officials wrote.

Nasdaq also wants the National Association of Securities Dealers, from which it is separating, to have expanded regulatory authority over market centers outside of Nasdaq.

Without changes in the SRO and intermarket surveillance programs and without an expansion in the regulatory jurisdiction of the NASD, Nasdaq officials warn that the regulatory system will fail. Market manipulation and other violations will be more likely to occur. They note that other regional exchanges will follow the lead of the Cincinnati and start to print their own Nasdaq trades.